business model – Investigate Midwesthttps://investigatemidwest.org
The Midwest Center for Investigative ReportingWed, 03 Apr 2019 18:48:42 +0000en-US
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1 https://wordpress.org/?v=5.2.3Opinion: Jury still out on whether Costco’s chicken experiment will flyhttps://investigatemidwest.org/2019/04/03/opinion-jury-still-out-on-whether-costcos-chicken-experiment-will-fly/
https://investigatemidwest.org/2019/04/03/opinion-jury-still-out-on-whether-costcos-chicken-experiment-will-fly/#respondWed, 03 Apr 2019 18:48:40 +0000http://investigatemidwest.org/?p=197398Costco sells its rotisserie chicken at the back of its stores at a loss to lure customers into the story to buy other things. Up until now those chickens by and large have come from Big Ag poultry producers like Tyson, Pilgrims Pride, and Perdue. But Costco is now bringing chicken production in house.

Those sentiments jumped to this side of the pond, becoming something of a point of debate in the 1928 presidential campaign between Herbert Hoover and Al Smith.

Turns out the Republican party in support of Hoover purchased campaign advertisements stating “Republican prosperity has reduced hours and increased eating capacity, silenced discontent, put proverbial “chicken in every pot.”

Smith mocked the ad on the campaign trail, suggesting the average working man could not afford a chicken dinner every Sunday – an argument while certainly true didn't win him the election.

Enter Costco which absolutely adores its $4.99 rotisserie deal. The chicken is so popular with the public that it has its own Facebook page.

In 2014, Costco reported selling 78 million of these processed, four-pound birds a year.

Costco sells its rotisserie chicken at the back of its stores at a loss to lure customers into the story to buy other things.

Up until now those chickens by and large have come from Big Ag poultry producers like Tyson, Pilgrims Pride, and Perdue.

But Costco is now bringing chicken production in house.

This September the warehouse superstore will open a 250,000 square foot processing plant, and 75,000 square foot hatchery and feedmill in Fremont Nebraska.

The plant is expected to process in excess of 2 million chickens a week and provide up to 43 percent of all rotisserie chicken sales and about a third of raw bird sales.

The complex has a $300 million dollar price tag, but Costco executives say in-house production will save as much as 35 cents a bird. And that ain't chicken feed.

But is it a good idea? And will other major food retailers (think Walmart) follow? I believe the retail industry will be watching closely. If Costco is successful, it’s a given that the competition will need to rethink its ag supply chains.

As to the business model … well Costco will need to ink contracts with about 125 poultry farmers to source all those chickens.

Essentially the farmers sign 15-year contracts to work for Costco. And that has some farmer trade groups up in arms.

“Here you have a retailer who will now—from cradle to grave—have complete control of the entire production system, They’ll own the birds, they’ll control all of the particulars of the birds’ genetics, the production. They’ll own the feed mill and they’ll have control of the processing plant. If this model works, what will it mean for the rest of the poultry industry? Will other retailers, like Walmart, be close behind?”

All this to keep Costco rotisserie chicken flowing to the public at $4.99 a pop?

Well … it will be quite a while before we know whether its a good deal for would be Costco chicken producers. New poultry farmers will bear all the up front risks of building new barns.

The plan assumes Costco won't ever cut production. That's not a given. The public is fickle. A chicken in every pot today may be nothing more than cobwebs tomorrow.

As for Costco ... assuming the retailer is successful in the eyes of its rivals vertical integration may become the new normal – not just for chickens but perhaps other foods.

We can't even begin to weigh what unforeseen, unintended consequences such a food production system will unleash.

About Dave Dickey

Dickey spent nearly 30 years at University of Illinois at Urbana-Champaign’s NPR member station WILL-AM 580 where he won a dozen Associated Press awards for his reporting. For 13 years, he directed Illinois Public Media’s agriculture programming. His weekly column for Big Ag Watch covers agriculture and related issues including politics, government, environment and labor. Email him at dave.dickey@investigatemidwest.org.

This column reflects the writer’s own opinions and not those of Big Ag Watch.